Simon Property Group Q2 2022 Earnings Call Transcript

Presentation

[Operator]

Greetings. Welcome to the Simon Property Group Second Quarter 2022 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded.

I will now turn the conference over to your host, Tom Ward, Senior Vice President of Investor Relations. You may begin.

[Thomas Ward, Senior Vice President - Investor Relations at Simon Property Group]

Thank you, Kyle [Phonetic], and thank you, everyone for joining us this evening. Presenting on today's call is David Simon, Chairman, Chief Executive Officer and President. Also on the call are Brian McDade, Chief Financial Officer; and Adam Reuille, Chief Accounting Officer.

A quick reminder that statements made during this call may be deemed forward-looking statements within the meaning of the Safe Harbor of the Private Securities Litigation Reform Act of 1995, and actual results may differ materially due to a variety of risks, uncertainties and other factors. We refer you to today's press release and our SEC filings for a detailed discussion of the risk factors relating to those forward-looking statements. Please note that this call includes information that maybe accurate only as of today's date.

Reconciliations of non-GAAP financial measures to the most directly comparable GAAP measures are included within the press release and the supplemental information in today's Form 8-K filings. Both the press release and the supplemental information are available on our IR website at investors.simon.com. Our conference call this evening will be limited to one hour.

For those, who would like to participate in the question-and-answer session, we ask that you please respect the request to limit yourself to one question.

I'm pleased to introduce David Simon.

[David Simon, Chairman, Chief Executive Officer and President at Simon Property Group]

Thank you. Pleased to report our second quarter results. Second quarter funds from operations were $1.1 billion or $2.96 per share prior to a non-cash unrealized loss of $0.05 from a mark-to-market in fair value of publicly held Securities.

Let me walk you through the big variances for this quarter compared to Q2 of 2021. Our domestic operations had an excellent quarter and contributed $0.13 of growth, driven by higher rental income of $0.09, strong performance in Simon brand ventures and short-term leasing of $0.05. TRG contributed $0.04 of growth, and they were partially offset by higher operating costs of approximately $0.05.

Our international operations posted strong results in the quarter and increased $0.10, lower interest rate or interest expense contributed $0.03. And these $0.26 of positive contributions were partially offset by the headwind from a strong U.S. dollar of $0.03 and $0.19 lower contribution from our other platform investments principally from JCPenney and a couple of brands within SPARC. These costs include -- these included costs associated with JCPenney's launch of new brands, the recent Reebok transaction and the integrated -- integration costs associated with that, and a softening of sales from our value oriented brands due to inflationary pressures on that consumer.

We generated $1.2 billion in free cash flow in the quarter, which was $200 million higher than the first quarter of this year, and we have generated $2.2 billion for the first six months of the year.

Domestic property NOI increased 3.6% year-over-year for the quarter and 5.6% for the first half of the year. Portfolio NOI, which includes our international properties grew 4.6% for the quarter and 6.7% for the first six months.

Occupancy at the end of the second quarter was 93.9%, an increase of 210 basis points and TRG was at 93.4%. The number of tenant terminations this year has been at record low levels.

Average base rent increased -- average base minimum rent increased for the third quarter in a row and was at $54.58. Leasing momentum accelerated across our portfolio. We signed nearly 1,300 leases for more than 4 million square feet in the quarter, have signed over 2,200 leases for more than 7 million square feet through the first half of the year. And we have a significant number of leases in our pipeline nearly 40% of our total leasing activity in the first six months of the year has been new deal volume. This is up approximately 25% from last year.

Retail sales continued. Mall sales volumes for the second quarter were up 7%. Our reported retailer sales per square foot reached another record in the second quarter at $746 per square foot for the malls and the outlets combined, which was an increase of 26%, $674 for the Mills, a 29% increase, TRG was at $1,068 dollars per square foot, a 35% increase.

We had began our national outlet shopping day, which was very successful for shoppers and participating retailers offering a timely first of its kind power shopping experience. More than three million shoppers visited our premium outlet and mills over the shopping weekend. Feedback following the event has been tremendous from both our retailers and consumers. We're already planning next year's event, which we expect to be bigger. So please stay tuned on that. Our occupancy cost at the end of the quarter are the lowest they've been in seven years 12.1% in Q2 of 2022.

Now, our other platform investments. Let's talk about it. We were pleased with the results of our investments in the platform for the second quarter. They contributed approximately $0.21 in FFO. Even though, we were down from last year's terrific results, primarily as I mentioned, continued investment and the inflationary pressures that have developed.

Based on our distributions, based upon our cash distributions received, we have no cash equity investment in SPARC and JCPenney. And in fact, we have parlayed our SPARC investment into our investment in AP -- in ABG, that is now worth over $1 billion. There will be a little more volatility from quarter-to-quarter when it comes to SPARC and JCPenney. But please keeping this in the proper perspective, it's all upside from here.

During the quarter, we also, as I mentioned, had our mark on our Soho and Lifetime Holdings of $0.05. A reminder on that, it's a non-cash mark, and we would expect that those, those companies would bounce back.

We completed the refinancing of 14 property mortgages during the first half of the year for a total of $1.6 billion at an average interest rate of 3.75%. We reduced our share of total indebtedness by more than $650 million. And once again, our balance sheet is strong. We have $8.5 billion of liquidity, $8.5 billion.

Today, we announced our dividend of $1.75 per share for the third quarter, a year-over-year increase of 17%. This will be payable at the end of the third quarter, September 30th. During the quarter, we repurchased 1.4 million shares of our common stock for $144 million.

And let me point out, while other companies in our sector are paying a little or no dividends and issuing equity, we are repeatedly raising our dividend and buying our stock back. We have now returned more than $37 billion of capital to our shareholders since we've been public, $37 billion.

Given our current view of the remainder of the year, we are increasing our full year 2022 comparable FFO guidance from $11.60 per share to $11.75 per share to the new range of $11.70 per share to $11.77 per share, which compares to a comparable number of last year of $11.44 per share. This is an increase of $0.10 at the bottom end of the range and $0.06 at the mid point of the range. The guidance comes in the face obviously of a strong U.S. dollar, rising interest rates and the inflationary pressures that are out there in the marketplace.

So let me conclude, I'm pleased with our second quarter results. Our business is strong with a higher income consumers in good shape. Brick and mortar stores are where the shoppers want to be outpacing e-commerce across the world and the broad retail spectrum demand for our space is extremely strong. Worldwide retailers need to grow, and they're doubling down on the U.S. International tourism is returning. Domestic tourism is strong.

Our redevelopment pipeline is growing with exciting projects, and our addition to our newly announced premium outlet new developments and expansions. We are experienced at managing our business through volatile periods, including leveraging our existing platform for operating efficiencies, allocating capital appropriately, managing risks. We are not over our skis in any aspect of our business. I encourage you look at our track record. We outperformed in these kinds of periods, and we also do some of our best work as well.

So thank you, operator. We're ready for any questions at this moment.

Questions and Answers

[Operator]

At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question is from Craig Mailman with Citigroup. Please proceed with your question.

[Michael Bilerman, Analyst at Smith Barney Citigroup]

Hey, it's actually Michael Bilerman here with Craig. Good afternoon, David. David, I was wondering, if you can talk a little bit about sort of that inflationary pressure that's on the retailers that you're starting to experience firsthand and obviously, your knowledge base of the retailer environment is significant. But now actually being on both sides, what can you do with the landlord to help your tenants through this period of time, where they are dealing with a lot of inflationary pressures and more inventory because arguably, I know from a landlord perspective, you want your rent to inflate and that just makes matters worse. So can you just talk a little bit about the things that you can do to take share and really leverage what you're learning on the retailer side for the benefit of share -- of the shareholders.

[David Simon, Chairman, Chief Executive Officer and President at Simon Property Group]

Well, thank you Michael for that question. So look we are not presumptuous to tell any retailer under any circumstance how to run their business. So it's really entirely up to them on how they see fit, how to manage inventory etc.

And just our own experience -- within SPARC, we have several brands. And we did see some softness in the more value-oriented brands, and then we had -- and again, I -- we do think that pressure on the consumer with respect to food, housing, obviously, gas, and they range it in. But again, I think the important thing to keep in mind, Michael is even with that said, we were profitable, we had an unbelievably strong year, last year with Penney and SPARC. We're still projecting really high EBITDA growth for these companies.

And even though, their -- obviously their consumers being cautious, back to school so far is off to a good start. Our traffic is actually pretty, pretty good. And I think just from our own operating experience, the SPARC management team and the Penney, I think do what a lot of retailers do. They rein in -- they rein in discretionary capital. They watch the overhead. They really don't close stores because stores are profitable to them. They watch marketing expenses, you know, that they're very focused on the payback when it comes to return on investment [Technical Issues] digital -- with digital spending.

So I think the JCPenney and SPARC team, you know, will do kind of similar to what others, but we would never tell a retailer what they should do. And if they want to compare notes, we're happy to do that, but that's just not our style. And again -- and we try to -- it's really important, this other business that we're in is not our, it's a very small part of our business. It's under 10% at the end of the day. We have no cash investment in it. So I've got -- I am just talking cash-on-cash return.

Let's go simple math. I've taken distributions -- cash distributions in both SPARC and Penney that basically has me at a zero net investment, and it will -- they will have volatility with the earnings like any other retailer, and you know that's just the way of the world, and it's all upside frankly. And these businesses are -- importantly, and this is very important. They are very well positioned. They are very well positioned to weather if this continues, which we kind of expected to. They are very well positioned to weather any storm because as a simple example, JCPenney has a $1.3 [Phonetic] billion in liquidity, just to throw that out there. So I hope that answers your question.

[Michael Bilerman, Analyst at Smith Barney Citigroup]

Thank you.

[Operator]

Our next question is from Alexander Goldfarb with Piper Sandler. Please proceed with your question.

[Alexander Goldfarb, Analyst at Piper Sandler Companies]

Hey, good afternoon. Good afternoon out there. David a question on, following up on the retailer platform income. The NOI this year was like $160 million in the year, last year it was $195 million. So is this some of the volatility that you're talking about and just curious what drove that mark?

And if I can do a footnote for a sort of quasi, second question, you mentioned something about the value brands in your retailer platform having trouble, but the other brands were doing well. Maybe just a little bit more comment on that?

[David Simon, Chairman, Chief Executive Officer and President at Simon Property Group]

Yeah. Look, Alex, it was $0.19 for the quarter, so we can spend a lot of time on it. But the reason I went through with you is because there -- we have no cash investments in these businesses. So I'm happy to go through it. But let's put it in perspective, please.

The point is, yeah. So let's just talk about SPARC. SPARC, Nautica, Brooks Brothers, Lucky did great, above budget. Eddie Bauer, above budget, so on. The only softness we really saw was a little bit in the tea [Phonetic] market at Arrow, a little bit in the fast fashion business in F21 and a little bit in JCPenney. We -- and we also, as we told everyone at the beginning of the year, we had significant integration cost at SPARC with respect to the Reebok transaction. So that -- so, and obviously that close, and we saw some of that in the second quarter. So that's the status.

Everything, we also had a management change at F21, which we think will be for the better that happened, I believe at the beginning of the year. We've got our -- we also had our new CEO at the -- at Penney, which also happened last year. So they are absolutely greatly positioned. We got all the confidence in the world and it's a [Phonetic] retailer, and there'll be ups and downs, $0.19 added $2.96, okay. That's the math. And no investment, no cash investment, okay. So I think I answered it. But if there's something you'd like me to dwell on more than I did, I'm happy to do. Well, I guess, your -- that's the one question, right? So it's over, right? Go ahead, Alex. I'll let you because I like you. Go ahead. What else you got?

[Alexander Goldfarb, Analyst at Piper Sandler Companies]

Okay. Well, then I'll ask you one other question. You guys are always financially savvy and you buy back stock. I'm imagining that buying back debt is not attractive, just given where your outstanding debt coupons are or has the disruptions in the debt markets given you opportunity to buy certain pieces of paper?

[David Simon, Chairman, Chief Executive Officer and President at Simon Property Group]

Well, we unencumbered. The reason we have lower interest expense is because we unencumbered assets. We have that flexibility. So we don't like the mortgage market unlike some others. We just write a check. And we I think -- that's why we have lower interest expense compared to last year and [Phonetic] I did the Q-over-Q because we can write a check and just unencumber it.

[Brian J. McDade, Executive Vice President, Chief Financial Officer and Treasurer at Simon Property Group]

At a lower cost.

[David Simon, Chairman, Chief Executive Officer and President at Simon Property Group]

At a lower cost. So we look at that all the time. And that may not be buying debt back, but it's more or less the same thing, ends in the same result.

[Alexander Goldfarb, Analyst at Piper Sandler Companies]

Thank you.

[David Simon, Chairman, Chief Executive Officer and President at Simon Property Group]

My pleasure.

[Operator]

Our next question is from Steve Sakwa with Evercore ISI. Please proceed with your question.

[Steve Sakwa, Analyst at Evercore ISI]

Yeah. Thanks. Good afternoon. David, I was wondering if you could provide a little bit more color on the leasing pipeline. It was nice to see the occupancy up as much as it was from Q1 to Q2. But could you talk a little bit more about the pipeline, the types of tenants? And when you sort of look at the demand, if you sort of were to try and bifurcate the portfolio maybe by sales, I guess, how different is the demand for the really strong centers versus maybe centers in the middle and the lower end of the portfolio?

[David Simon, Chairman, Chief Executive Officer and President at Simon Property Group]

Well, again, our lower end is -- it's just not -- just a -- it's a good question because we don't put these numbers in. But our EBITDA weighted -- this excludes TRG, but our EBITDA weighted sales are $954 a foot. Our average base rent actually increased 70 basis points at $73.41 versus $72.87. So -- and that's what's driving our NOI, right, because it's the bigger property.

So, yeah, look, it is across the board. It's also across the retail type, it's restaurants, it's entertainment, it's obviously the high end folks, but it's -- and I don't like naming retailers, Rick does, but it will always bother me, and he's not here to do it. So -- but there -- we have value-oriented retailers that are on a -- on very much aggressive opening program. So it really is across the board. Only the best properties get the high end folks.

We're seeing a big rebound in Vegas, Florida is on fire, California is finding its sea legs, Westchester and Roosevelt Field, they are all coming back as the suburbs. So Midwest has been stable. So we're seeing it across the board by retailer, by price points, by geography, by mix, pretty much across the board. And so, I mean, it's -- I'm not -- it's not really granular, and you probably wanted names, but -- and we have not seen, thankfully, even with -- that -- with what's going on in the world. We really haven't seen anyone back out of deals of note at all.

And I said this last quarter, I said it this quarter in my prepared remarks, the U.S. is the -- let's hope the U.S., we don't screw it up. But the U.S. is the bastion of growth for the world compared to -- because we know, China's with that way COVID is dealt with there, that's going to have ebbs and flows. And I think our economy is still pretty healthy, consumers in good shape. I think the growth will continue in the U.S. And I think the future is bright here.

[Operator]

Our next question is from Adam Kramer with Morgan Stanley. Please proceed with your question.

[Adam Kramer, Analyst at Morgan Stanley]

Hey, David, and good afternoon. I just wanted to drill in a little bit more on capital allocation You obviously raised the dividend here again, was active on the buyback in the quarter in just a couple of months, and put out these kind of press releases as well about some of the kind of a new and renewed development projects. So I just wanted to kind of maybe hear you kind of maybe rank or just kind of discuss the different options for capital allocation here, and I know external growth is, it's always may be an option as well. You talked about it last quarter. But maybe if you could just kind of rank the different options here with your capital and excess free cash flow.

[David Simon, Chairman, Chief Executive Officer and President at Simon Property Group]

Well, look, as a REIT, it will always be the dividend. But -- so that would -- I mean, it's hard to me to rank it. But I think, clearly, the dividend, we have to pay out 90% to 95% of our taxable income. There is a difference if you pay out 90% technically versus 95%. But you got to pay out 95% of your taxable income.

We're fortunate to be highly -- we had taxable income. So we pay out close to -- we're at 100% of our taxable income, that's growing. So that's going to be paid out in cash. Obviously, we've modified that twice in our history. One was COVID, obviously, when we were shut down; and two was in the Great Recession. So that always will rank number one.

Two is, we -- our stock is just -- we look at other REITs, we look at other S&P 500 companies, we look at our balance sheet, we look the fact that we're a cash flow Company that generates cash, return on equity. We make deals like SPARC that gets all our money back, and we have free cash flow. We can figure out our value. So the reality is a market -- we have refuted e-commerce, taking the malls down. We have withstood COVID. Our business is strong, growing in the

Enclosed mall business. And the enclosed mall business, it's strong. Yet, we have naysayers out there that don't believe it, but we believe it,. So our stock is cheap, and we're going to keep buying stock back.

And then I think we have a duty to make our properties as efficient and as attractive as we can to the consumer. I mean, obviously, we have to do it with a remind -- we have to do with a return on investment methodology, i.e., if we had a property, and we spent all this money on and got no return, then we wouldn't do it. But where we can do that, that's what we should do and we will do that.

And then the external stuff, I don't really care about. And it -- if it has -- if it's there and it makes sense, we'll do it. We have the flexibility to do it. But I'd rather do the dividend, buy our ridiculously cheap stock back, make our existing portfolio better, and then every once in a while, we'll have great new development to do that we'll do it because that also is a core competency of ours that we'll do. And that's how I look at it.

[Operator]

Our next question is from Derek Johnston with Deutsche Bank. Please proceed with your question.

[Derek Johnston, Analyst at Deutsche Bank Aktiengesellschaft]

Hi, everyone. Good evening. Yeah. So on real estate, Phipps Plaza slated for an October open or re-launch, let's say. So David, I believe you took roughly $1 million in NOI offline to develop. So upon stabilization, what NOI contribution from this project is expected? And really, should we look at this, as one of the key earnings accretion blueprints looking ahead with other mixed-use projects? Thanks.

[David Simon, Chairman, Chief Executive Officer and President at Simon Property Group]

Yes. Thanks. Thank you. I'm happy to focus on real estate. And look, I mean, Phipps is fantastic story because we took an old department store. It had Phipps [Phonetic], it was an underperformer, had 14 acres. We couldn't redevelop it. We're going to spend around $350 million, and we're going to get about a $35 million of NOI just on that. But more importantly -- well, I shouldn't say more importantly, in addition to that -- and eventually, we'll show everybody what we did. But we -- the leasing momentum that we have created there in terms of retenanting, re-leasing Phipps is staggering.

So Phipps, again, we don't really disclose that. But my guess is the existing property will increase by roughly 30% NOI when we're done with it, if not more without that -- not including the incremental that's what I just mentioned. But because of all the retenanting and more importantly, we will have all of the best brands when we're done with it, and that's ongoing. That won't all be done probably until '24 because some of the other existing retailers have leases, and they're coming over after that.

But we're taking a quiet mall and making it -- and it's going to be, I think, the hub of activity in a great area in Buckhead and a lot of good stuff is happening in Atlantic at the same time. But yes, the simple answer to your question is, I would hope to do that in Brea, Ross Park, go down the list. But yeah, we have a ton of those opportunities. And the mixed-use -- most of our real estate is really well located and adding the mixed-use components, especially residential really does add a lot of synergy, a lot of mojo to the property. So we hope for that to continue.

[Derek Johnston, Analyst at Deutsche Bank Aktiengesellschaft]

Thanks.

[David Simon, Chairman, Chief Executive Officer and President at Simon Property Group]

Sure.

[Operator]

Our next question is from Greg McGinniss with Scotiabank. Please proceed with your question.

[Greg McGinniss, Analyst at Scotiabank]

Hey, David, hopefully, easy two-parter for you. But how is the broader economic environment adjusted the process for adding projects to development pipeline, then how the increases in construction costs and labor shortages impacted pipeline returns and time lines?

[David Simon, Chairman, Chief Executive Officer and President at Simon Property Group]

Let me talk time lines. The only -- the biggest issue that we're having on time lines is in what I call in the restaurant industry in that some of the equipment required to open restaurants does have a backlog. This -- the storefront improvement is increasing. Obviously, tenants are very, very focused on that, not affecting timing, but it is something that we're watching -- has not affected deal flow or deal economics. And I do think the good news when it comes to on lease [Phonetic] materials, we are at a lower level than we were a few months ago. So on a timing side, it's really just equipment for restaurants.

On our return development, nothing -- yeah, we have a little bit more here and there, but nothing that is going to ultimately decide to go from a go project to a negative. If anything, in a lot of these cases, we're planning on higher income, so they seem to be getting basically the same returns. But we're not -- nothing has changed dramatically that would suddenly scratch the project.

[Greg McGinniss, Analyst at Scotiabank]

If I could just add just real quick to that. What about now that you have a lower priced stock to investment in the stock versus redevelopment expense, Slide number 22.

[David Simon, Chairman, Chief Executive Officer and President at Simon Property Group]

I do -- I think we can do both. I think we -- and again, I mean, some of these things, we really want folks to focus on others in our sector. When you put us in perspective, we're buying stock back. We're not issuing equity, and we're raising our dividend. I don't -- there are very few, and that you can define the sector anyway you want, and I don't want. But there's not many -- we're just built a little bit differently -- even though we may be in the same industry, we were built differently, okay.

And so that's the important point, and that's why we really try to emphasize it much like we emphasize SPARC about some of the mathematical differences about our Company beyond just we're in the same business. It is math. At the end of the day, you got to run your business, so the math works. But yeah, I'd like buying our stock back. But like I said, I do think we have a duty to continue to invest in our portfolio, as long as we see the right return on investment on that.

[Greg McGinniss, Analyst at Scotiabank]

Thanks, David.

[David Simon, Chairman, Chief Executive Officer and President at Simon Property Group]

Sure.

[Operator]

Our next question is from Mike Mueller with JP Morgan. Please proceed with your question.

[Mike Mueller, Analyst at JPMorgan Chase & Co.]

Yeah. Hi. The year-over-year ABR per square foot comp for TRG looks pretty strong at about up 5%. Is there anything out of the ordinary driving that?

[David Simon, Chairman, Chief Executive Officer and President at Simon Property Group]

No. I just think we've worked well together and the portfolio is in great shape and driving -- and we're driving growth out of it collectively. So it's all good.

[Mike Mueller, Analyst at JPMorgan Chase & Co.]

Okay. Thank you.

[David Simon, Chairman, Chief Executive Officer and President at Simon Property Group]

Thank you.

[Operator]

Our next question is from Floris van Dijkum with Compass Point. Please proceed with your question.

[Floris van Dijkum, Analyst at Compass Point]

Thanks for taking my question, guys. Last quarter, you indicated that your signed not open pipeline was around 200 basis points, I believe, and it was a little bit higher in the malls than the outlets. I was curious if you can give an update on that. And also maybe, David, you've got these retailers, are you -- everybody has been talking about a glut of inventory, will you create outlet stores for some of your retailers? And where else are you seeing some of the demand for the outlets coming from? Is there more luxury potentially that's coming to the outlets or homewares? Or where -- what other segments do you think will expand into the outlet business?

[David Simon, Chairman, Chief Executive Officer and President at Simon Property Group]

Well, I'll let Brian answer the -- that was very clever to get two questions. I'll let Brian answer the first, and then I'll take a shot at the second part.

[Brian J. McDade, Executive Vice President, Chief Financial Officer and Treasurer at Simon Property Group]

Floris, we're still hovering right around 200 basis points in the second quarter.

[David Simon, Chairman, Chief Executive Officer and President at Simon Property Group]

And then...

[Floris van Dijkum, Analyst at Compass Point]

Okay.

[David Simon, Chairman, Chief Executive Officer and President at Simon Property Group]

Well, and then, I would say -- there's no -- I mean there -- some of these -- the big, big retailers had a glut of inventory. We -- the luxury guys do not have a glut of inventory, okay? So that's not happening. And to the extent that -- the SPARC brands, by and large, are already in a lot of outlets, some of ours, a lot or not ours. There's really no change in plan.

Maybe there's been a few -- some of the brands, not just SPARC, but elsewhere had a few pop-ups. But net ebbs and flows, I don't think, Floris, there's any real interesting dynamic going on that. And there's not a lot of folks with a glut of inventory as far as I can see, I mean, yeah, obviously, some bigger folks. But most of those guys want to plug [Phonetic] it through their existing system, and there is no -- the higher end folks, there's no glut of inventory that we see.

[Floris van Dijkum, Analyst at Compass Point]

Thanks, David.

[David Simon, Chairman, Chief Executive Officer and President at Simon Property Group]

Thank you.

[Operator]

Our next question is from Vince Tibone with Green Street. Please proceed with your question.

[Vince Tibone, Analyst at Green Street]

Hi, good evening. Could you drill down a little more on sales trends during the quarter? Did sales start to slow down at all in the back half of the quarter as inflation accelerated and recession fear increased?

[David Simon, Chairman, Chief Executive Officer and President at Simon Property Group]

No. No, not really. So it was -- I mean, not really. We didn't really. In fact, in July, in a lot of cases, we saw a little bit better results recently. So no real trend there, Vince.

[Vince Tibone, Analyst at Green Street]

That's good to hear. That's helpful. And then just maybe one follow-up to that. Are you seeing any difference in tenant sales performance between the higher end and luxury tenants versus the more main three brands, presumably the latter would be more impacted by the inflation issues?

[David Simon, Chairman, Chief Executive Officer and President at Simon Property Group]

I would absolutely -- we definitely have seen that where the value-oriented retailers or -- there's no question the consumer that is pressed on discretionary income is dealing with a very difficult situation with food, obviously, gas and dwelling. So -- and they're reining in their spend. So there's no question about that.

But we're -- and we're -- but we haven't really seen that at all in kind of the better brands. And like I mentioned earlier, SPARC, like the Brooks Brothers, the Lucky's of the world are doing very well. But where you do see it a little bit is in the value-oriented retailer or the younger consumer that suddenly gases taken a lot out of the pocket book.

[Vince Tibone, Analyst at Green Street]

Great. Thank you. Appreciate it. Thank you.

[Operator]

Our next question is from Craig Schmidt with Bank of America. Please proceed with your question.

[Craig Schmidt, Analyst at Bank of America]

Great. Thanks. Domestic same store NOI was up 3.6% compared to 7.5%. It looks like a lot of it was due to the tougher comps in second quarter. And in that case, it seems like the comps only get more difficult third and fourth quarter. Is that why the same store NOI number might actually be going down for the second half of the year? Or is it the macro factors?

[David Simon, Chairman, Chief Executive Officer and President at Simon Property Group]

No. I mean, Craig, we were really clear. We're actually outperforming what we thought. We -- Q1 of last year had the big benefit of going up against COVID, right? So now we were really, really clear what we saw overall, and we've been outperforming. And I think we'll outperform our initial guidance of 2%, but that's nothing other than that or normal seasonality of the business, Craig. Yeah. I mean this is better than our plan and is consistent with our plan, even though the trend is above our plan.

[Craig Schmidt, Analyst at Bank of America]

So that you're leasing year-to-date, if you will, is strong enough that you think that -- has it continued in July? And do you think you could continue despite some of the macro factors?

[David Simon, Chairman, Chief Executive Officer and President at Simon Property Group]

Well, I've said that several times. Yes, the answer is we have not -- our pipeline is as strong as it's been. We're doing a bunch of new deals. Now Craig, you know when you sign a lease, the store doesn't open tomorrow in a lot of cases. And this is really, really important for everyone to understand, we're very optimistic because a lot of the leasing that we've done really doesn't open until '23, '24. So not only are we outperforming our budget this year off a strong last year, but we actually feel really good that as we get these stores open that we leased to over the last six months, nine months. That, that will continue to fuel positive comp NOI. Thank you, Craig.

[Craig Schmidt, Analyst at Bank of America]

Thank you.

[Operator]

Our next question is from Michael Goldsmith with UBS. Please proceed with your question.

[Michael Goldsmith, Analyst at UBS Group]

Good evening. Thanks a lot for taking my question. On the guidance, the low end of the range has come up, the high end relatively flat at a time when you're seeing softening of sales at your lower income brand. So my question is, what's implied for the performance of the base business in the second half kind of relative to what you saw in the domestic and international operations in the second quarter? Maybe said in another way, how sensitive is your performance to the macro environment? And what's the outlook for percentage rent?

[David Simon, Chairman, Chief Executive Officer and President at Simon Property Group]

Well, it's a very -- look, I think we feel really positive about the portfolio, the results that we will generate from the portfolio. And again, the higher income consumer is still spending money. And if anything, I think if you go back in history and actually, Tom, did a very good piece on that. If any of you're interested, you can call Tom. He'll go through it with you.

Our business and our industry actually tend to outperform during recessionary environments to the extent that we get there and maybe we're in one, maybe we're not, I'll stay out of that political definition primarily because the big ticket items suddenly go toward kind of what we sell at our properties. So -- and that's kind of a -- somewhat of an insurance policy, and it's historically always proved to be very, very positive. So even in every recession, other than COVID when we were told to shut down, our cash flow from our properties was flat. It did not decrease. So Tom has a great paper on it. If you're interested, we'll charge you, but we'll give you the data.

I think the same case will be here. We'll -- if we do get into a full-blown recession, our cash flow will be positive. They won't maybe grow as high. We'll have some exposure on sales. But we do see the big tickets kind of go away, and they move toward the items that we sell in our properties. And again, and I think you asked something about SPARC, again, it's really just a couple of the brands. It's also going against a great year. And again, let's have a bigger picture view of that business.

[Michael Goldsmith, Analyst at UBS Group]

Okay.

[David Simon, Chairman, Chief Executive Officer and President at Simon Property Group]

Thank you.

[Operator]

Our next question is from Juan Sanabria with BMO Capital Markets. Please proceed with your question.

[Juan Sanabria, Analyst at BMO Capital Markets]

Hi, good afternoon. Just wanted to ask with regards to the month-to-month leases that are still on the books are a little bit higher than the historical average. Should we expect that to stay there? Or are you still comfortable kind of now for higher rents? Or how are you thinking in the [Phonetic] current context?

[David Simon, Chairman, Chief Executive Officer and President at Simon Property Group]

Yeah. I think that's more a function of documentation than deal making in that we don't put that done until signed and a lot of our bigger renewals have been done over the last two months, three months, four months, and all that's being documented. So I would expect that number would continue to go down. But we have no fear in that number.

[Juan Sanabria, Analyst at BMO Capital Markets]

Thank you.

[David Simon, Chairman, Chief Executive Officer and President at Simon Property Group]

Thank you.

[Operator]

Our next question is from Haendel St. Juste with Mizuho. Please proceed with your question.

[Haendel St. Juste, Analyst at Mizuho]

Hey there, good afternoon. Dave, I guess a question on -- a follow-up on the seasonality of NOI first half of this year. Second quarter NOI was lower than the first quarter based on supplemental in both periods, which is unusual. How are operating expenses impacting typical seasonality? And what's embedded in the [Technical Issues] for opex this year? Thanks.

[David Simon, Chairman, Chief Executive Officer and President at Simon Property Group]

Yes. We -- I didn't -- we didn't gather your first question. Could you please repeat it?

[Haendel St. Juste, Analyst at Mizuho]

First question about the impact of seasonality and the sequential NOI for 1Q to 2Q. 2Q looked lower than 1Q, which is unusual. And so I was actually asking how operating expense...

[David Simon, Chairman, Chief Executive Officer and President at Simon Property Group]

I think -- I don't -- see, I don't think the NOI was lower quarter over -- sequentially quarter-over-quarter. You think, we did -- we do have a lot of the companies hit in overage rent in the first quarter because their leases end in January 31. So you pick some of that up in Q1, but that's not -- that would be the only reason.

[Haendel St. Juste, Analyst at Mizuho]

And on opex, any color on perhaps might be impacting seasonality or perhaps what's your expectation embedded in the 2% same store [Indecipherable] mentioned?

[David Simon, Chairman, Chief Executive Officer and President at Simon Property Group]

We're -- again, I'm sorry, but your connection is really not so good.

[Brian J. McDade, Executive Vice President, Chief Financial Officer and Treasurer at Simon Property Group]

We're not really seeing much inflation just yet in operating expenses. As you think about us, we've got long-term contracts that protect us from material increases.

[David Simon, Chairman, Chief Executive Officer and President at Simon Property Group]

I mean, we did increased our operating expenses $0.05. We did hit a negative $0.05 for the quarter there.

[Operator]

Our next question is from Ki Bin Kim with Truist Securities. Please proceed with your question.

[Ki Bin Kim, Analyst at Truist Securities]

Thanks. Just a follow-up on Haendel's question. Your NOI from Klepierre and HBS also increased pretty significantly in 2Q over Q1. Also curious about how much of that is sustainable in a run rate perspective or if there's some onetime items?

[David Simon, Chairman, Chief Executive Officer and President at Simon Property Group]

Well, no, Klepierre was shut down last quarter. So this is kind of more -- I mean, last year this quarter. So this is -- they're still not firing on all cylinders, so we'd expect future growth here. So comparing Q2 of '21 compared to Q2 of '22, Q2 of '21, they were under a lot of restrictions and in some places closed. And HBS is so small. It's insignificant. But there's not real -- there's no real change there. We -- it's a lease that pays a certain amount of rent every month. So it's -- there's no very little growth other than like the normal step-ups. Very small, but the change is [Speech Overlap].

[Ki Bin Kim, Analyst at Truist Securities]

I actually meant sequentially. Well, I actually meant sequentially. I actually meant that sequentially, it increased by, I think, $10 million as well.

[David Simon, Chairman, Chief Executive Officer and President at Simon Property Group]

Well, we did a restructuring. So that's part of it.

[Brian J. McDade, Executive Vice President, Chief Financial Officer and Treasurer at Simon Property Group]

And they're doing better, quite honestly. They announced results in strong results. So I think you're seeing that starting to come through our results as well.

[Ki Bin Kim, Analyst at Truist Securities]

Okay. And I'm not sure if I missed it or not, but any kind of commentary you can share on what the lease spreads look like in 2Q? And given that you're close to 94% occupancy, as you continue to increasing that, what kind of pricing power do you expect to gain when you start to reach 95% or 96% occupancy?

[David Simon, Chairman, Chief Executive Officer and President at Simon Property Group]

Well, rents are all moving in the right direction, and our spreads are moving in the right direction, too.

[Ki Bin Kim, Analyst at Truist Securities]

Okay. Thank you.

[David Simon, Chairman, Chief Executive Officer and President at Simon Property Group]

Thank you.

[Operator]

Our next question is from Linda Tsai with Jefferies. Please proceed with your question.

[Linda Tsai, Analyst at Jefferies Financial Group]

Hi. Thanks for taking my question. On the guidance, original guidance was domestic NOI of 2% growth and year-to-date, it's 5.6%. So is there any update to the 2%?

[David Simon, Chairman, Chief Executive Officer and President at Simon Property Group]

As we've said for several years, we do not update that. We give you our best guess at the beginning of the year. It's all part of our plan. We disclose what we think the number is. Well, we do not update it quarter-to-quarter other than as we've said, we're pretty confident we're going to beat our initial expectations.

[Linda Tsai, Analyst at Jefferies Financial Group]

Got it. And then can you talk about what you're most focused on from an ESG perspective in 2022? And what are some initiatives, where we might see some progress?

[David Simon, Chairman, Chief Executive Officer and President at Simon Property Group]

Well, we -- I mean that's a -- I don't have enough time to go through it. But obviously, we're -- it's across the enterprise. And obviously, from an operating point of view, a lot of it continues to be focused on reducing our carbon footprint, but -- and giving back to the communities, which we do in a lot of different ways. But it's a -- that's a it's a very -- that's a very long. Please read our report. If you don't have it, there's a link, I'm sure, Tom can give it to you. But it's -- that it's certainly focused on -- the big item is focusing on reducing our carbon footprint.

[Linda Tsai, Analyst at Jefferies Financial Group]

Thank you.

[David Simon, Chairman, Chief Executive Officer and President at Simon Property Group]

Thank you.

[Operator]

We have reached the...

[David Simon, Chairman, Chief Executive Officer and President at Simon Property Group]

Sorry for that.

[Operator]

We have reached at the end of the question-and-answer session. And I will now turn the call over to Mr. David Simon for closing remarks.

[David Simon, Chairman, Chief Executive Officer and President at Simon Property Group]

Okay. Thank you. I believe that's our allotted time. So thanks for everybody's questions. And any follow-up, please call Tom and Brian. Thank you.

[Operator]

[Operator Closing Remarks]

Participants

Corporate Executives

• Thomas Ward, Senior Vice President - Investor Relations
• David Simon, Chairman, Chief Executive Officer and President
• Brian J. McDade, Executive Vice President, Chief Financial Officer and Treasurer

Analysts

• Michael Bilerman, Smith Barney Citigroup
• Alexander Goldfarb, Piper Sandler Companies
• Steve Sakwa, Evercore ISI
• Adam Kramer, Morgan Stanley
• Derek Johnston, Deutsche Bank Aktiengesellschaft
• Greg McGinniss, Scotiabank
• Mike Mueller, JPMorgan Chase & Co.
• Floris van Dijkum, Compass Point
• Vince Tibone, Green Street
• Craig Schmidt, Bank of America Co.
• Michael Goldsmith, UBS Group AG
• Juan Sanabria, BMO Capital Markets
• Haendel St. Juste, Mizuho
• Ki Bin Kim, Truist Securities
• Linda Tsai, Jefferies Financial Group Inc.